What The New Kindle Means To Amazon

On Thursday, Amazon announced another family of branded shopping carts in which consumers can pile a wealth of digital goods. Sure, they may look like a Kindle e-reader, or the new Kindle Fire tablets - but make no mistake about the goals Amazon has for the new devices.

Company executives pitched the new Kindles as the perfect devices on which to consume e-books and magazines, and the Fire as a showcase for movies, music, the Web and Android apps. So forget the hardware, their purpose is clear - to provide a dedicated sales channel for Amazon’s digital storefront. (To get up close and personal with Amazon's new devices,  see A Close-Up Look At Amazon's New Kindles.)

Michael Gartenberg, an analyst for Gartner, summed up in a tweet what he told ReadWriteWeb earlier in the week: “Amazon’s proposition: sell devices that connect to an end-to-end set of services.”

In fact, that’s exactly what Amazon chief executive Jeff Bezos dubbed the Fire at its launch event in Santa Monica, Calif. People don’t want gadgets any more; they want services, and the Kindle Fire is a service, Bezos said. It even greets you by name.

Hardware Features Are In Fact Services

The range of Kindle hardware Amazon launched Thursday wasn’t spectacular; a new “Paperwhite,” high-contrast Kindle tablet for $119, plus a $179 3G option. Amazon also upgraded the Kindle Fire tablet and added an interesting new HD model that starts at just $299 with an 8.9-inch screen.

But the real innovations were in features and pricing: X-Ray, a tool to connect customers to the movies they want to see, via the IMDB database that Amazon acquired, and a new in-game advertising service that can deliver physical as well as virtual items to the customer, using Amazon’s one-click method. And there’s no contract or annual fee to use the inexpensive but limited wireless broadband services attached to the Kindle. The 250MB per month limit is plenty for downloading books from Amazon, but nowhere near enough for worry-free Web browsing or streaming music or video. Amazon wants you to be able to buy for free, fast and on the go - but that’s about it. Virtually every feature was designed to facilitate shopping at Amazon’s store.

“The Kindle and particularly the Kindle Fire have served as hardware devices designed to showcase Amazon’s digital ecosystem and services,” Gartenberg told ReadWriteWeb. “In a world driven by ecosystems more and platforms less, that’s an important set of devices for them to have on the market.”

“This wasn’t an announcement from Amazon, it was more like a declaration of war,” Gartenberg added via Twitter.

Amazon did not announce a smartphone, as some had expected.

What Kindle Means To Amazon

Amazon’s goal is to lure new shoppers, and once inside, keep them. It’s a walled-garden approach that has been tried by companies ranging from Apple all the way back to the early days of AOL’s dial-up service.

But it’s been unusually effective for the company: In the U.S. alone, 86% of consumers who said that they’ve ever bought something on a Web marketplace also said that they have shopped with Amazon at some point, Forrester Research found. The percentage of Amazon’s e-commerce revenues as a total of the total amount spent online by U.S. shoppers has increased from 9% in 2001 to 19% in 2011.

As Bezos explained at the announcement, “We want to make money when our customers use our devices, not when they buy our devices."

Apple has also been successful with the walled-garden approach, with its curated iOS Apps Store and its music and movie sales via iTunes. Avi Greengart, an analyst with Current Analysis, noted that Apple’s strengths are in apps, its user interface and its momentum. Amazon just provides cheaper content.

Kindle Moves Beyond The Experimental Stage

“My hunch is that it started as an experiment,” said Sucharita Mulpuru, a retail analyst with Forrester, of the Kindle family. “There have been other readers before, and it probably started at some level as a way to reduce their friction online. Since then, it has morphed into something else, because of all the fights with publishers.”

When Amazon began selling digital versions of books, it originally underpriced them as a way to gain market share. The publishers themselves were outraged, but they were also handicapped; Amazon was also one of their largest customers, after all.

And the role of the e-book has only continued to increase; according to a July report by BookStats (co-produced by the Association of American Publishers) revenue from ebooks more than doubled from 2010 to 2011. More significantly, e-books are now the dominant format in terms of net revenue - surpassing print - for the category of adult fiction, the first time that has ever occurred.

“I don’t think Amazon expected that to happen - they had never seen something like that happen before, in the print space,” Mulpuru said of the outrage that met its e-book pricing decision. “I think that the company then went back, because they’re incredibly arrogant, and said, ‘We can win! How can we win by making this a complete vertical play, and getting into publishing ourselves?'”

Amazon then hired Laurence J. Kirshbaum, who formerly ran the Time Warner Book Group, to head its own digital imprint.

But at its heart, Amazon’s business is e-commerce - not just books, but also electronics, garden tools, food, even medical supplies and construction equipment. “Everything has to support that business in some way,” Mulpuru said.

"The Biggest Threat To Retailers Since Wal-Mart"

What that means is that Amazon is willing to make the Kindle and the Kindle Fire a loss leader to lure shoppers inside its virtual store.

That strategy hasn’t escaped the notice of giant retailers like Target, which has booted the Kindle from its own store shelves. Mulpuru suspects Amazon may launch kiosks or small physical stores in airports and other hubs, precisely to convince flyers to pick up a Kindle and download a book before their flight.

“I think [Amazon] is the biggest threat to retail since Wal-mart, and it’s one of the most disruptive forces in every industry that it touches, from consumer electronics to fulfillment and logistics, to commerce and retail,” Mulpuru said.

“It’s baffling,” Mulpuru added. “It almost begs the question, if  [Amazon has] all these profitable businesses, at some point why don’t they just get rid of [their] physical retail business and just have all these profitable businesses? But I think this is just where the megalomania, the crazy vision of Jeff Bezos comes in. I think this is his libertarian values, his crazy attitude; he just wants to stick it to everybody. He just wants to shake it up in a completely radical way, and prove that it can be done.”